TransDigm Group Incorporated — Fiscal 2010 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2010. The filing also provides unaudited fourth-quarter results for the quarter ended September 30, 2010. TransDigm designs, manufactures and supplies highly engineered proprietary aerospace components for commercial, business, regional and military aircraft.
Business context
- More than 95% of fiscal 2010 sales were from proprietary products, approximately 80% from sole-source products, and approximately 60% from aftermarket sales.
- Fiscal 2010 sales mix was approximately 40% commercial aftermarket, 23% commercial aerospace OEM, 34% defense and 3% non-aerospace.
- Boeing, including Aviall, represented approximately 14% of sales; the ten largest customers represented approximately 48%.
- Estimated backlog increased to $467 million from $402 million, although orders may be cancelled or deferred.
Financial performance and liquidity
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Net sales | $827.7 million | $761.6 million | +8.7% |
| Gross profit | $473.1 million | $429.3 million | +10.2% |
| Gross margin | 57.2% | 56.4% | +0.8 percentage points |
| Operating income | $363.1 million | $335.4 million | +8.2% |
| Operating margin | 43.9% | 44.1% | -0.2 percentage points |
| Net income | $163.4 million | $162.9 million | +0.3% |
| Net margin | 19.7% | 21.4% | -1.7 percentage points |
| Basic and diluted EPS | $2.52 | $3.10 | Declined due largely to the special dividend allocation |
| EBITDA | $393.2 million | $362.9 million | +8.4% |
| EBITDA As Defined | $411.6 million | $374.7 million | +9.9% |
Fiscal 2010 fourth-quarter net sales were $223.1 million, gross profit was $132.4 million and net income was $50.6 million. Fourth-quarter basic and diluted EPS was $0.96.
- Cash flow from operating activities was $197.3 million, essentially unchanged from $197.1 million in fiscal 2009.
- Capital expenditures were $12.9 million, and acquisition spending was $166.6 million. Net cash used in investing activities was $176.6 million.
- Cash and cash equivalents increased to $234.1 million from $190.2 million. Working capital was $470.5 million.
- Total debt was $1.772 billion versus $1.357 billion in fiscal 2009. Debt represented approximately 74.9% of total capitalization, and the reported debt leverage ratio was approximately 4.3 times EBITDA As Defined.
- The company had $198.0 million of available borrowing capacity under its $200 million revolving facility, subject to applicable conditions and covenants.
- Fiscal 2011 capital expenditures were expected to be $15 million to $20 million.
Material changes versus the prior comparable period
- Sales growth was driven primarily by acquisitions. Acquired businesses contributed approximately $73.8 million of fiscal 2010 sales, while organic sales declined approximately 1.0%, primarily because of lower commercial OEM demand.
- Commercial aftermarket sales increased $6.2 million and defense sales increased $2.7 million, partially offsetting an $18.7 million decline in commercial OEM sales.
- Gross margin improved because of product mix, pricing and cost reductions, despite acquisition-related costs and lower fixed-cost absorption on organic volume.
- Selling and administrative expense increased 18.6% to $94.9 million, reflecting acquisition costs, $2.7 million of transaction-related expenses, higher research and development spending and professional fees.
- Net interest expense increased 33.0% to $112.2 million, primarily because of the $425 million of 7.75% senior subordinated notes issued in October 2009.
- Stockholders’ equity declined to $593.0 million from $819.2 million, principally because of the $404.9 million special dividend and related dividend-equivalent payments.
Acquisitions, outlook and unusual items
- TransDigm acquired Semco Instruments for approximately $71 million in cash in September 2010 and acquired Dukes Aerospace for approximately $96 million in cash in December 2009. Fiscal 2010 acquisition spending also included other recently acquired businesses and product lines.
- On September 25, 2010, the company agreed to acquire McKechnie Aerospace for approximately $1.265 billion in cash. Closing was subject to regulatory and other conditions, and the filing stated that completion was not assured.
- Management intended to finance McKechnie and refinance part of existing debt with new senior subordinated notes and a new senior secured credit facility. The filing expected approximately $1.3 billion of additional debt if the acquisition closed.
- Management stated that commercial aerospace conditions had begun to improve, with expected recovery in revenue passenger miles and commercial OEM production. Military-related sales were expected to be flat to modestly down from elevated levels.
- Management believed internally generated funds and available revolver capacity would fund operations, capital expenditures, research and development and debt obligations through at least fiscal 2011, absent disruptive events.
- The company paid a one-time special dividend of $7.65 per share, totaling approximately $374.6 million, funded substantially through the October 2009 notes offering. It did not anticipate regular cash dividends.
Principal risks and contingencies
- High leverage, floating-rate debt, refinancing needs and restrictive covenants could constrain financial flexibility. A one-percentage-point increase in interest rates was estimated to increase annual interest expense by approximately $7.8 million on the term loans.
- Commercial aftermarket demand depends on flight hours, revenue passenger miles, fleet size and age, and airline profitability. OEM demand is cyclical and sensitive to economic conditions.
- Customer concentration, fixed-price contracts, limited minimum purchase commitments and possible order cancellations create revenue and margin risk.
- Defense revenue depends on government budgets, procurement timing and geopolitical conditions. Government contracts may be terminated, repriced or audited.
- Regulatory approvals, product certifications, export controls, product liability, environmental obligations, labor negotiations and supply-chain disruptions could adversely affect operations.
- Goodwill of $1.572 billion and identifiable intangible assets of approximately $400.4 million represented a substantial portion of total assets and are subject to impairment risk.
- The McKechnie transaction carried execution, integration, remediation and additional leverage risks, including potential liabilities associated with McKechnie environmental and legal matters.
Investor verification checklist
- Verify whether the McKechnie acquisition closed and the amount and terms of debt ultimately raised to fund it.
- Reconcile reported EBITDA and EBITDA As Defined to GAAP net income and operating cash flow; these are non-GAAP measures with significant adjustments.
- Review debt maturities, refinancing progress, covenant compliance and the status of the $198 million revolving commitment.
- Assess organic sales trends separately from acquisition-driven growth, particularly commercial OEM versus aftermarket demand.
- Monitor customer concentration, backlog conversion and order cancellations or deferrals.
- Evaluate goodwill, intangible assets and acquisition integration performance for impairment or margin pressure.
- Review the special dividend’s effect on equity, leverage, EPS and future cash availability.